Question

1. The level of prices and the value of money Suppose the price level reflects the number of dollars needed to buy a basket of goods containing one cup of tea, one biscuit, and one magazine. In year one, the basket costs $9.00. In year two, the price of the same basket is $8.00. From year one to year two, there isdeflation at an annual rate of . In year one, $72.00 will buy baskets, and in year two, $72.00 will buy baskets. This example illustrates that, as the price level falls, the value of money .

Answer 1

Answer:

as the price level fall, the value of money increased.

Explanation:

the impact of deflation on an economy is that  its decreases the price level of goods and services but increases the value of currency.

this is seen by the illustration given:

In year 1, A basket cost $9 and $72 can buy 8baskets

In year 2, A basket cost $8 and $72 can buy 8baskets. though the price level as reduces but the value of $1 increases.

For example, Let say, I am buying baskets from Nigerian, provided the values of currency are not constant.

Given, N = naira

@ N1       = $9, = 8 basket is obtained

@N1.125  =$8, = 8 basket is also obtained (becaused value of currency as increased )